Why Raghuram Rajan thinks India won’t be next Sri Lanka, Pakistan – Outlook India | Omd Cialis

At a time when pundits’ fears that India could end up like crisis-hit Sri Lanka are widespread, former Reserve Bank of India (RBI) Governor Raghuram Rajan sounded confident the concerns were misplaced when he recently praised the RBI for its discretion in raising reserves and dealing with inflation.

Referring to foreign exchange reserves, a major pain point crippling Sri Lanka today, Rajan told a publication: “We have adequate foreign exchange reserves. RBI has done a good job of increasing reserves. We don’t have problems like Sri Lanka and Pakistan. Our foreign debt is also lower.”

Rajan, who currently sits on the Economic Advisory Council to the Tamil Nadu Prime Minister, said India’s robust foreign exchange reserves and low external debt make it more resilient to price shocks.

India’s foreign exchange reserves for the week ended July 22 were US$571.6 billion. By the end of March, India’s external debt was $620.7 billion, according to RBI data. The external debt-to-GDP ratio fell to 19.9 percent in March this year from 21.2 percent a year earlier.

Rajan also pointed out how the rate hikes the RBI opted for would help ease inflationary pressures. In 2020, the RBI sharply cut the benchmark interest rate to boost economic activity and recover from Covid’s hit. But before the full effects of a low interest rate regime could be felt, the war between Russia and Ukraine added to inflationary pressures and forced the RBI to raise short-term interest rates twice – first by 40 basis points in May and by a further 50 basis points in June.

Food and fuel have been hit hardest by inflation, Rajan said, but he is optimistic. “As we can see, food inflation is declining globally and will also be declining in India,” he said.

The former RBI governor isn’t the only one allaying fears. Recently, even former NITI Aayog Deputy Chairman Arvind Panagariya said that while learning from the crisis Sri Lanka is facing would be a good lesson for India’s future macroeconomic management, the comparison is “silly”.

In an interview with a publication, Panagariya pointed out that India’s budget deficits have been kept under control and that India has rarely borrowed foreign capital to finance its budget deficit. He also mentioned that while the exchange rate was allowed to devalue to keep India’s current account deficit low, the RBI’s monetary policy has kept inflation in check and the opening of financial capital flows has been done in a calibrated manner. “Insinuations of parallels between India and Sri Lanka are ridiculous at this time,” he said

Behind the India-Sri Lanka link-up

Economists have been drawing parallels between the economic situation in India and Sri Lanka for some time.

The neighboring island nation is facing its worst economic crisis in 70 years, with annual inflation hitting a record 60.8 percent in July. Sri Lanka’s foreign exchange reserves also ran out in May and its usable reserves fell below $50 million, resulting in the country being unable to repay its external debt.

The country also defaulted on its debt for the first time in its history. A one-month grace period to repay $78 million in unpaid interest payments expired in early July. A defaulting country finds it difficult to borrow from international markets as defaults deal a deathblow to its currency and economy. Rising inflation, depletion of foreign exchange reserves and failure to import essential commodities such as medicines, fuel and food have combined to affect their ability to repay national debt. His administration has held rounds of talks with the International Monetary Fund over a $3 billion bailout.

Fears that India is heading towards Sri Lanka were further bolstered by India’s crippling inflation figures. India’s retail inflation in June was 7.01 percent, beating the RBI’s target range of 2-6 percent. In the food basket, June inflation was 5.66 percent for grains and produce, 8.61 percent for meat and fish, and 17.37 percent for vegetables.

But the pundits’ concerns are more than just inflation. On July 21, the rupee broke through 80 for the second time in intraday trading. High crude oil prices, a strong overseas dollar and large outflows of foreign funds from domestic markets are among the reasons behind the rupee’s decline. Experts have said the depreciating rupee is unlikely to bode well for exports as global income is subdued. In June, India’s trade deficit widened to a record $25.63 billion. There are also concerns that a falling rupee could lead to bankruptcies and imported inflation.

Even though Rajan and Panagariya have erased the parallels between the two countries, India still has work to do.

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